Transcript

ALI MOORE, PRESENTER: As you've heard, it was a big day on the economic front: an interest rate cut and a $42 billion stimulus package. Nearly three quarters of the $42 billion will be invested in schools and housing, with $12.7 billion earmarked for one-off payments.

The big spending means a big deficit, peaking at $35 billion in 2009/2010.

Treasury is also forecasting unemployment of up to seven per cent and economic growth of one per cent this year, falling back to three quarters of a per cent next year.

The big question: will what was announced today be enough to stave off a recession? For an economic analysis, I spoke to the CEO of Lateral Economics Nicholas Gruen in our Melbourne studio.

Nicholas Gruen, $42 billion; more than 60 per cent of money to be spent on infrastructure investment $12.7 billion on one-off payments; and in the words of the Prime Minister, "no guarantee of a perfect landing." Will this work?

NICHOLAS GRUEN, CEO, LATERAL ECONOMICS: Perhaps you should have hired a clairvoyant. I can't tell you it will be - the answer, the result will be perfect, just like the Prime Minister. But I'm pretty impressed with the package. I think it's been fairly well thought through and it's as good a guess as to what one ought to do as one could make, I think.

ALI MOORE: It's clearly a balance between the short term spending stimulus and longer term infrastructure spend. How quickly do you think this money can make a difference?

NICHOLAS GRUEN: Well, the spending that goes into people's pockets is obviously designed to make a difference as quickly as possible. It probably won't make a difference as quickly as the money that went into our pockets in November, 'cos we were all thinking of Santa at the time. And I don't think you can spend quite that amount of money on Easter eggs. So, that will trickle into the economy over the next six months, I think, or rather, say, 60 or 70 per cent of it will. But at least it will start as soon as possible. And then we'll be trying to ramp up the relatively small scale infrastructure projects. So I think that's a pretty sensible way to go. And one of my lingering concerns is the current account deficit and our rising foreign debt, which is starting to get scary. And in two or three years all of this burden on the budget, all of the revenue measures, all of the spending measures will be lifting themselves off the balance sheets. So that makes a lot of sense to me.

ALI MOORE: When you look at the way the package is structured and when you look at the likely flow of money, will it be fast enough to stave off a recession?

NICHOLAS GRUEN: If you ask me to guess, I'd say "no". But it will certainly make any recession that occurs quite a bit shallower and - so that's got to be a good thing.

ALI MOORE: If we look at the budget forecast, we will be looking now at a deficit peaking at $35 billion in 2009/'10; still $34 billion in 2010/'11. Could those numbers in fact end up looking conservative?

NICHOLAS GRUEN: Absolutely, absolutely. I can't see the problem. I mean, we've run - we've racked up something like $70 billion worth of surpluses over the last decade. That's what, that's what surpluses are for, that's what deficits are for. They're there because the Government, as I like to put it, is the risk taker of last resort. The Government is coming in and saying that it's going to bear more of the risk in the economy when the private sector is moving out.

ALI MOORE: Despite the size of this package, and of course, we've also got a full one per cent interest rate cut today, do you think that there is more to come?

NICHOLAS GRUEN: I would actually like to see more coming from the Reserve Bank. Again, that gets back to my concern about the current account and foreign debt. The more we can do it on the rate cut side, the better.

ALI MOORE: That said, $42 billion: do you think it will mark the start of a turnaround.

NICHOLAS GRUEN: You have to have a clairvoyant to ask that. It really does depend on what the global economy is going to do. I think this could be extremely nasty, but it's not beyond the bounds of possibility that it is a bit of a - a little bit of a - that we're overdoing it now. That's what we tend to do, we tend to overdo optimism. We did that as recently as a year or so ago. We may be overdoing pessimism, but that's how I feel at the moment.

ALI MOORE: Better to overdo pessimism at the moment?

NICHOLAS GRUEN: Yes, absolutely, absolutely. It would be better to find out that we'd done too much than that we'd done too little. That's what we have tended to do.

ALI MOORE: Let's hope we are being too pessimistic. Nicholas Gruen, many thanks for joining us.